Who The Heck Consumes Capital?
The Gold Standard Institute's Keith Weiner on capital:
"I have been writing about consumption of capital, using the example of a farmer who sells off his farm to buy groceries. It’s a striking story, because people don’t normally act like this. Of course, there are self-destructive people in every society, but, not many. Most people know not to spend themselves into poverty."
"I have been writing about consumption of capital, using the example of a farmer who sells off his farm to buy groceries. It’s a striking story, because people don’t normally act like this. Of course, there are self-destructive people in every society, but, not many. Most people know not to spend themselves into poverty."
SOURCE URL: http://snbchf.com/gold-standard/
I've never seen that put so succinctly.
It's like a company stopping issuing dividends and instead putting that money into a buyback of shares. This causes the asset price to rise and the dividend yield to fall. If the company pays dividends, the investor automatically receives some profits of the business and can choose whether to spend them. If the company uses that money for a buyback, the investor has to sell shares to capture those profits. It's mathematically the same, but the investor described here has an emotional aversion to selling shares.
“Suppose the rate keeps falling. One person after another buys the house, handing a profit to each seller. Each seller is given the incentive to spend some of his gain. However, nothing has been produced though this entire series of transactions. If nothing is produced, then what are these successive sellers consuming? They consume something that was previously produced. It’s otherwise known as capital. Endlessly rising home prices consumes capital.”
This scenario is the same if everyone just keeps whatever real estate holdings they have and watches passively as rates fall and asset prices rises. It has nothing to do with trading. Astute investors don't just calculate the value of real estate by the revenue they generated vs. today's cost of capital. They factor in the expected value of cost of capital in the future. They can also tease apart whether something material changed about the property or if prices are just responding to rates.
Tighter monetary policy would not change any of this. The income investor would still have to decide how much income to draw from her portfolio and how much to reinvest. The RE investor or homeowner has to make the same business if rates are higher, meaning a lower price-to-rent ratio, that he does in a low-rate environment.
Only Banksters.
No cheap lending being made to productive businesses. Banksters are preying on the bones of productive business.